After 2012, homeowners will owe federal income taxes in 2013 if they have a short sale or foreclosure. But if a lender officially waives the mortgage deficiency, which allows homeowners to sell for less than they owe, they have until Dec. 31, 2012, to complete a short sale or foreclosure without tax consequences.

But the IRS rule changes on Jan. 1, 2013: The amount a lender forgives on a short sale or foreclosure for a primary residence will be taxable on federal income taxes. Some homeowners might have a tough decision this year: Is it time to sell an underwater home?

After deciding to sell a house in a short sale, homeowners should immediately ask lenders about waiving the deficiency, said Charles Gallagher III, a St. Petersburg attorney.

"If they can get it waived at the outset, it won't bite them back later," Gallagher said.

By not waiving the deficiency, lenders could attempt to collect the money for 20 years. Homeowners could battle collection agencies, garnishment and liens for two decades. Homeowners could also avoid paying the tax on any cancellation of debt income by declaring bankruptcy, Gallagher said.

A deficiency waiver could save homeowners thousands of dollars in taxes.

For example, a property owner who sells for $50,000 short of what is owed on the loan would pay taxes on the $50,000: $12,500 if they're in the 25 percent bracket; $7,500 if in the 15 percent tax section.

The law first came into effect five years ago when the real estate market imploded.

The Mortgage Debt Relief Act of 2007 "generally allows taxpayers to exclude income from the discharge of debt on their principal residence," according to the Internal Revenue Service. "Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief."

Up to $2 million of the deficiency can be forgiven this year, $1 million if filers are married and filing separately, according to the IRS. Lenders must officially forgive the deficiency in writing by Dec. 31. Homeowners would be on the hook even if the house sold but the bank had not formally forgiven the loan in a letter.

"It's a huge issue — it will be a shock to many taxpayers after 2012," said Mark Steber, the Florida-based chief tax officer for Jackson Hewitt Tax Service.

Short sales are on the rise in the bay area and climbed nearly 25 percent in the last five months of 2011. Currently, more than 4,500 properties in the Tampa Bay area are listed for sale as a short sale.

The deals had typically taken six months or longer to complete. But lenders have streamlined the process in recent months to close the deals quicker.

Information from the (South Florida) Sun Sentinel was used in this report. Mark Puente can be reached at mpuente@tampabay.com or (727) 893-8459. Follow him on Twitter at twitter.com/markpuente.